Stocks to avoid like the plague in 2021… and those poised to bounce right back

Thousands of firms are hoping for a swift return to health after a gruelling 2020. 

And experts say the Brexit deal, vaccine roll-out and a new president in the White House will hopefully spark life back into the UK and global economies. But not all businesses will recover quickly. So how can investors spot the difference between a cheap stock set to soar, or one that is unlikely to gain value any time soon? 

Experts say companies affected negatively by the spread of the virus fall into two camps — boomerangs and zombies. Boomerangs are well positioned to bounce back quickly. Yet zombie companies, which are by no means doomed, are not expected to make such a speedy recovery.  

READY TO REBOUND 

Hospitality, travel and leisure were among the hardest hit industries during the pandemic. But John Moore, senior investment manager at wealth management firm Brewin Dolphin, says several firms in the sector should make a solid recovery. 

SSP Group and Diageo are on his boomerang list. SSP is a food and beverage company that owns chains in train stations and airports, nationally and abroad. Its brands include Upper Crust, Millie’s Cookies, Caffe Ritazza and Camden Food Co. 

Although its share price is more than 50 per cent lower than its February peak, it has risen by 75 per cent since November to 326.6 pence. And if, and when, passenger numbers increase, its recovery should continue. 

Catering company Compass Group is in a similar position. The purchase of digital food platform Feedr in March has given the firm space to grow in a new direction but its core business is dependent on a return to sports, events and offices. 

Diageo, which has brands such as Guinness, Baileys and Gordon’s gin, has benefited from our thirst for a stay-at home tipple, but has lost out on duty-free sales and the sale of premium spirits to restaurants and bars. 

Experts have also flagged IHG, owners of Intercontinental Hotels and Holiday Inn, as a boomerang stock. The firm had started expanding into Asia and the U.S. before the pandemic, and bookings are already strong as Chinese and American families are forced to holiday on home soil. But investors should be careful not to assume all leisure business will bounce back quickly. 

ZOMBIE FIRMS 

Unlike boomerangs, ‘zombie’ companies are less likely to bounce back at the moment their industry is up and running again. These firms might have complicated business models, carry a lot of debt, or have a history of mistakes. 

Mr Moore says Royal Bank of Scotland, Lloyds Banking Group, BT, and Royal Dutch Shell could all be zombie stocks. He says after a series of setbacks since the last financial crisis, the big banks still need to better reduce costs and strengthen online security before they’d be a safe bet. 

Meanwhile, BT made a series of U-turns recently over mergers and expansion, and oil firm Shell is being challenged by the world’s move to renewable energy sources. Mr Moore says: ‘I’m not saying these firms cannot turn things around, but investors need to see evidence improvements have been made before they are persuaded to invest.’ 

Ryan Hughes, from investment broker AJ Bell, says retail and property were both zombie sectors. Firms such as Debenhams and Arcadia did not survive the pandemic. Property company Intu, owners of shopping centres, was also a casualty. 

BACK A BOOMERANG 

Mr Hughes recommends Fundsmith Equity, managed by Terry Smith, for investors who want exposure to Intercontinental Hotel Group (IHG). The fund invests in stocks that have strong brands. A £10,000 investment made five years ago would now be worth £23,905. 

Brewin Dolphin suggests Ninety One UK Alpha, managed by Simon Brazier, for investors who want to back a host of boomerang companies such as Diageo, easyJet, Ryanair, IHG and Booking.com. The fund, which has turned £10,000 into £12,310 over the past five years, does hold BT and Shell stocks, because while they are not expected to recover quickly like a boomerang, the long-term prospects are still good. 

Teodor Dilov, fund analyst at Interactive Investor, likes R&M UK Recovery. It specialises in recovery stocks which it says are good businesses currently experiencing below-normal profits that have driven down the share price. A £10,000 investment made five years ago would now be worth £15,000.